Q4 2020 Watts Water Technologies Inc Earnings Call
Ken.
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I would now like to turn the conference over to your Speaker today, Timothy Macphee, Treasurer, and Vice President Investor Relations. Thank you. Please go ahead.
And good morning, everyone welcome to our fourth quarter and full year 2020 earnings conference call joining.
Joining me today of Bob Pagano, President and CEO interest shrink with the all of our CFO.
Bob will provide an overview of the past year have you about 'twenty 'twenty, one priorities as well as update you on our market expectations for this year.
Shashank will provide a detailed analysis of our fourth quarter and full year financial results.
To discuss our outlook for 2021.
Following our prepared remarks, we will address questions related to the information covered during the call.
Today's webcast is accompanied by a slide presentation.
Can be found in the investors section of our website.
We will refer to the slides throughout our prepared remarks any reference to non-GAAP financial information is reconciled to the relevant GAAP measure in the appendix to the presentation.
Before we begin I'd like to remind everyone that during the course of this call we may be making certain comments that constitute forward looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially.
The information concerning these risks see our publicly available filings with the SEC.
The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
With that I will turn the call over to Bob.
Thank you, Tim and good morning, everyone.
Please turn to slide three in the earnings presentation, and I'll offer some reflections on 2020 and provide our updated thoughts on 2021.
I want to start out by expressing my deepest gratitude to our employees around the world their dedication since the start of the pandemic has been unwavering to ensure our customers' needs were being met and our business continues to move forward.
This past year has tested everyone's endurance and patients I'm. So grateful to our experienced team there was able to nimbly adapt to the dynamics of this constantly changing global environment and I'm confident the team will continue to proactively manage our business to meet our customer expectations in 2021 and accelerate watts.
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I'm also pleased to report that we continued to make progress in our environmental social and governance efforts and in diversity equity and inclusion initiatives this past year.
Our sustainability performance improved following the evaluations from several leading ESG rating agencies, and we supported our customers and local communities that were impacted by the pandemic.
As you know our product portfolio is aligned with three macro themes safety and regulation energy efficiency and water conservation.
We believe this focus dovetails well with the ESG framework.
In 2020, we launched our first diversity equity and inclusion survey, which identified key focus areas and we formed working groups to lead our global diversity initiatives. We've also deployed employee training and development programs relevant to this effort.
As a company we enacted a comprehensive response to COVID-19 challenges.
The employee safety was and remains our priority through.
Through our COVID-19 task force, we emphasize safety protocols in the workplace that met or exceeded the CDC and other country specific requirements.
Secondly, given we are an essential business, we maintained the customer focus we set up of hotline very early in the pandemic to aid health care customers with any urgent requirements.
We expanded our library of online learning tools to offer training and to stay in touch with our customers, which has provided us with great insights into customer focus areas and usage and we continue to invest in new product development to address our customers' needs.
Regarding our 2020 performance.
We proactively took very aggressive cost actions starting late in the first quarter of 2020.
These address long term structural as well as short term discretionary costs the.
Totality of these actions was the positive impact of $55 million to our operating income in 2020.
Clearly some of the short term actions are a headwind in 2021.
The cost actions helped us maintain our operating margin as 2019 levels. Despite the topline headwinds. We also invested in the strategic new product development and in our smart and connected the strategy.
We increased free cash flow over 2019 levels by 14% and we strengthened our balance sheet by paying down debt, putting the company on solid footing as the pandemic subsides.
We prioritize liquidity by managing working capital extending our financing agreement and aggressively paying down existing debt through repatriation and operating cash flow.
We continued our balanced capital allocation strategy, we invested 50% more than 2019 and capital spending to fund growth and productivity. We continue to invest in new product development and we made two small bolt on acquisitions, we acquired the Australian valve group in Q3, and the detection group or <unk>.
T D G in the fourth quarter, which I'll discuss momentarily finally, we sustained our dividend and share repurchase programs.
Given the circumstances and challenges we faced 2020 was the successful year for our company.
Next I'll review, our key priorities for 2021.
As I previously mentioned employee safety is our number one priority will continue to promote proper hygiene and safe social distancing practices.
In 2020, we delivered of over 100000 training sessions, both online and through virtual lunch and learn meetings.
This represented a 70% increase in training sessions over 2019.
In 2021, we will continue to enhance our training programs for customers reps engineers and contractors in order to drive further customer connectivity.
We will continue to elicit customer feedback to drive new product introductions and solutions, including expanding our smart and connected portfolio.
We'll look for opportunities to expand geographically into new regions, either organically or through acquisition per.
The activity will continue to expand through our one watts of performance initiatives and is expected to help fund incremental 2021 long term investments.
Now, let's briefly talk about how we see the market shaping up in 2021.
We gave some preliminary views on this year's markets during our November earnings call.
Since then we have finalized our internal operating plan and updated industry data has been published.
Also two important macro unknowns have been crystallized, namely the U S elections are behind us and effective vaccines have been approved and the deployment process has begun.
But it's still uncertain is when we can effectively reach herd immunity, which in turn depends on how quickly the vaccine can be disseminated to the broader population and how many people off to take the vaccine.
From a macro perspective GDP forecasts in all our major regions are expected to grow from 2000, Twenty's depressed levels with most of our key countries expanding at 3% or higher.
In the Americas, our market expectations for new construction in both the commercial and residential markets are still mixed and vary by Submarkets.
The new residential single family construction in general looks to be steady with persistently low interest rates higher housing starts expected job and income growth and positive demographics driving anticipated mid to high single digit growth in single family housing starts in 2021.
And the Lira index is anticipating the growth rate of homeowner spend on repair and replacement projects to continue into 2021 with spending increasing approximately 4%.
However, multifamily starts are expected to decline mid single digits in 2021.
The nonresidential, we anticipate that overall growth will be challenged we still see divergent growth prospects dependent on the end market.
The latest industry indicators, including the Abi construction market data and construction industry confidence indexes are all portending a decline in nonresidential construction in 2021.
The AI a recently released its semiannual consensus construction outlook, which expects new non resi construction spend in the U S to decrease by about 6% in 2021.
Also AGC recently released survey results based on over 3500 contractors that concluded 2021 will be a very difficult year for many construction firms in their markets.
Given the various industry indicators and feedback we're getting from the channels. We are anticipating air pocket in activity impacting of starting in the second quarter of this year due to the reduction in non residential and multifamily new construction starts during the pandemic exists.
The existing funded projects continue and are being finished but we expect new construction projects starting in the second quarter and through year end, maybe down significantly.
In Europe. The markets were also mixed in our drains business. The commercial Marine segment is expected to continue to be challenged project markets are lumpy and homebuilding is flat.
Government sponsored home energy subsidies in Germany should continue to provide support and we see more wholesale of activity in France at least in the near term as we enter 2021.
In Italy, there are concerns with government programs protecting employment that expired in March which could impact of unemployment and the recovery there.
In the Asia Pacific region. The overall economy is expected to grow with GDP up in all regions.
China is forecasted to grow over 8% in 2021.
Finally, middle East GDP is expected to grow in the three per cent range, so a little slower than other regions and likely being more influenced by adverse geopolitical issues and energy demand.
Now I'd like to provide an update on our smart and connected product initiatives. Please turn to slide four.
When we started evaluating the potential for transforming our portfolio to be smart and connected in 2015, we realized we had deep capabilities and competencies in our Watson electronics, and <unk> businesses, but little in the way of the development pipeline or strategic plan.
A day each of our business units has clear strategic goals to digitally transform their product portfolio where possible.
Additionally, we have created and deployed a dedicated team that has a mandate for ensuring that our connections are robust scalable with our businesses and most importantly secure.
With these added resources, we have more than 85 people working exclusively on smart and connected products globally of 55% increases in resources over 2019.
Cumulatively, we have exceeded 70000 connected devices shipped since we started selling smart and connected products.
The primary goal of our smart and connected initiatives is to enhance the value of our products provide to customers. We are focusing our efforts on the following key areas safety and regulation like our entellus station digital mixing products water hygiene like our <unk> scientific instruments energy efficiency and products like.
Our air cooled boilers, and PPI water heaters leak detection systems like the century, plus backflow discharge system.
These systems will ultimately provide us with the meaningful data that we can begin leveraging to further enhance our product performance customer service levels and our own operational activities in.
In addition, we see pathways towards subscription services and.
In 2020, our smart and connected solutions continued to represent a larger share of our sales and we're in the mid teens of total watch sales.
We're still focused on achieving our goal of 25% smart and connected product sales by 2023.
On slide five let me highlight two smart and connected product solutions.
As I mentioned previously we made a small acquisition in the fourth quarter of company called the detection group our T D G.
<unk> provides factory mutual prove wireless leak detection products and notification services for commercial and multifamily buildings.
Sales of approximately $4 million annually.
We were interested in T D G as another offering to bundle into our overall smart and connected suite of products. The products are addressing the key pain points for commercial and multifamily building owners that been rising insurance costs due to water leaks, we welcomed the T. D. G team two watts.
On the right side of the slide you will see an in house developed solution that leverages multiple watts brands to provide a single connected user experience.
The dormont flow Pro M. D combines our dormont gas connector manufacturing with our tech more electronics expertise on a single Bluetooth enabled device and is utilized by service technicians and gas equipment installers to read and document consumption pressure and flow of GAAP.
Gas via a proprietary mobile app.
This allows installers to quickly identify and report of a problem may be related to equipment or to disturbances in the gas line.
This reduces the need for return service calls and increases efficiency during the initial startup or repair and maintenance procedures low.
<unk> is another good example of how far we can combine our capabilities to create solutions that address everyday customer challenges.
We remain excited about the future of smart and connected systems, and what it's bringing to watts in the industry.
Now the Shenk, who will review our results for the fourth quarter and full year and offer our outlook for 2021 Shashank.
Thank you Bob and good morning, everyone.
Please turn to slide six which highlights our fourth quarter results.
Reported sales of $403 million were up 1% year over year.
The organic sales were down 2%, but was more than offset by net of quite sales and of foreign exchange tailwind.
While each region experienced lower organic sales American Europe sales were better than anticipated.
The quiet sales net of divestiture approximated $1 million in the quarter.
I will review the regional performances momentarily.
Adjusted operating profit of $55 million.
A 10% increase translated into an adjusted operating margin of 13, 6% up 110 basis points versus last year.
Benefits from cost actions, including the restructuring and productivity savings more than offset lower volume and incremental growth and productivity investments.
The investments total $3 million in the quarter.
Adjusted earnings per share of $1 15 increased 15% versus last year.
Growth was driven by <unk> from operations and seven primarily from a lower adjusted effective tax rate and positive foreign currency translation.
The adjusted effective tax rate in the quarter was 24, 6%.
The rate declined as compared to last year at new regulations provided an opportunity to benefit from a favorable tax election, and we received tax benefits related to foreign exchange on cash repatriation.
GAAP reporting included a net tax charge of $9 7 million or 29 cents a share primarily driven by increased income tax expense, resulting from the recently issued final tax regulations, which.
Reduce the realize the ability of foreign tax credits in summary, aggressive cost controls and of higher American and European top line drove the better than anticipated operating results.
Moving to the regional results, please turn to slide seven.
In the Americas reported sales decreased by approximately 1% to $264 million organic net sales were down by approximately 2% with growth in certain plumbing and electronic products being more than offset by reductions in heating and hot water water quality trains and HVAC product sales.
Together positive foreign exchange movements in the Canadian dollar and the BTG acquisition added one percentage of sales year over year.
Americas adjusted operating profit for the quarter increased 1% to $46 million and adjusted operating.
Operating margin expanded 40 basis points to 17, 4% the.
The margin increase was driven by cost savings and productivity, which more than offset the volume reduction net incremental investments.
We made approximately $2 million more in investments in the previous year.
Overall America sales were slightly better than anticipated with cost actions driving the positive bottom line.
Turning to Europe.
Sales of $120 million were up 6% on a reported basis.
Is it mainly by a stronger euro as foreign exchange increased sales by 8% year over year organically sales were down 2%, which is better than we had expected from.
The platform perspective, we saw growth in fluid solutions from high of plumbing, and HVAC sales being more than offset by continued softness, especially sales into the commercial marine market.
The region, we saw growth in Italy, with France, flat, and Germany, and Scandinavia of both count.
At least our strength in the plumbing wholesale electronics and OEM markets, France, so growth in the wholesale and OEM markets being offset by drain.
In Germany. The sales decline was driven by reduced crane sales into commercial marine applications and in electronics, partially offset by continued strong sales into the Oems that are supporting government subsidized energy savings programs.
Scandinavia was down in the southwest and dreams and wholesale market.
Adjusted operating profit in Europe of approximately $17 million, a 25% increase over last year adjusted.
Operating margin of 14% increased 220 basis points, primarily due to cost actions and productivity, including restructuring savings, which more than offset lower volume of investments.
In summary, Europe's top line performed better than expected and along with restructuring benefits delivered a solid operating performance in the quarter.
Now, let's review the asphalt quarter results.
Sales of approximated $19 million up 1% on a reported basis with favorable foreign exchange movements of 5% Prime the in China, and net acquired sales growth of 4% more than offsetting an organic decline of 8%.
We saw a double digit organic growth within China, where the commercial valve sales into the data centers continued to be strong.
Outside of China double digit organic sales declines in the middle East and Australia offset nominal growth in New Zealand.
Adjusted operating profit of $3 $4 million was up 13% versus last year with adjusted operating margin up 170 basis points, driven by cost controls productivity and high intercompany volume, partially offset by lower third party volume of investments.
So at BSL continued China growth, while other regions of still dealing with the impact of Covid.
On slide eight let me speak to the full year results.
Well 2020 reported sales were $1 5 billion down 6% on a reported basis.
The decrease was primarily driven by an organic sales decline of 7% attributable to the impact of COVID-19.
Foreign exchange and acquisitions had a 1% positive effect of sales year over year.
Adjusted operating margin was 12, 9% in 2020 flat with 2019 and a good result, factoring in lower volume.
The decremental of decline in adjusted operating profit was 13% for the year.
We weren't able to mitigate the impact of the volume decline for the aggressive cost actions, which totaled $55 million in 2020.
It is important to note that we maintained our adjusted operating margin, while still funding incremental investments of roughly $9 million during the year.
Adjusted full year earnings per share of $3 88 declined 5% versus the prior year.
There was a decrease from operations due to the pandemic related sales declined but this was partially offset by lower adjusted effective tax range and favorable foreign currency translation.
Free cash flow for the full year was of $187 million.
An increase of 14% over 2019, driven by better working capital management, especially in the accounts receivable.
Free cash flow conversion was 164%.
We increased free cash flow, while still investing 50% more in key projects over 2019.
These investments were specifically in new product development.
Capacity expansion and factory productivity.
In total we invested $44 million in 2020, which equates to a 140% of reinvestment ratio.
In 2020, we returned $60 million to shareholders in the form of dividends and share repurchases, an 18% increase over 2019.
During 2020, we also paid down debt by $110 million.
Our net debt to capitalization ratio is now negative at 2% at year end as compared to a positive eight 4% in the prior year.
We used cash from repatriation and operations to pay down debt.
Our balance sheet continues to be in excellent shape and provides substantial flexibility to address our capital allocation priorities.
Given the many operating and personal challenges, we face with Covid in 2020, our ability to proactively manage costs maintain margins in a down environment and strengthen our balance sheet was noteworthy.
The <unk> characterize the year of successful and I would agree.
Now on slide nine let's discuss the general framework, we considered in preparing our 2021 the outlook.
First let's look at expected headwinds.
COVID-19 will continue to be a focal point in the evolution of the pandemic could provide potential of headwind until we reach herd immunity.
We mentioned the non residential and multifamily air pocket that could affect new construction and discretionary repair replace.
It's timing and Atlanta will determine the impact on our business we.
We presently believe that this air pocket in fact are starting in the second quarter of 2021.
Consistent with our ongoing strategy, we are going to incrementally reinvest for the long term growth of the business, especially in investments to drive our smart and connected strategy.
The $55 million of cost actions, we took in 2020, we expect that approximately $15 million of these console of the return in 2021.
These costs include pay reductions government incentives travel and Mark Com.
In the middle column of our themes that we'll continue to monitor kind.
Several geopolitical concerns that could impact Asia Pacific and the middle East as well as Europe.
With the U S election results behind Us and the new administration in place the transition of new policy proposals will take time to sort out, especially regarding further fiscal stimulus and future potential tax increases.
Commodity inflation, especially in comprehend scale have been significant.
We have also experienced substantial cost increases and logistics packaging and insurance, we have announced price increases to help mitigate the current cost increases.
Now looking at anticipated tailwind.
Residential single family construction should continue to grow in 2021.
We expect to benefit from new product introductions, including additional smart and connected products.
We intend to drive continuous improvement through our one watts performance assets with the additional productivity initiatives within our factoring walls as well as in the SBA function.
And we should benefit from incremental savings on cost actions taken last year.
As discussed our balance sheet is exceptionally strong coming into 2021, we have the flexibility to pursue inorganic growth opportunities to augment the business, assuming the transaction meets our strategic and financial criteria.
Lastly, global economies are expected to continue to recover in 2021 from the lows of the Covid induced recession of 2020.
With that backdrop, let's review our outlook for the full year 2021.
On slide 10, we have provided our major assumptions.
We estimate that organically Americas sales may range from down 5% to flat in 2021.
We expect adjusted operating margin in the Americas, maybe down compared to 2020 with incremental cost savings and productivity initiatives offsetting increased cost that was suspended last year.
Sales should increase by about $4 million with the addition of the <unk> acquisition.
For Europe, we are also forecasting organic sales could be down 5% to flat.
Adjusted operating margin May decline for similar reasons as the Americas.
And Anthony we expect organic sales growth from 2% to 6% for the year.
Sales should also increase by approximately $6 million from the AVG acquisition.
We anticipate adjusted operating margin may decline against 2020 at some level of expenses.
We introduced an intercompany volume is expected to decline year over year.
Overall on a consolidated basis, we anticipate watts organic sales to range from down 5% to flat in 2021.
Organically, we expect that first half sales, maybe better than the second half from a year over year perspective.
We have an easier second quarter comp due to the major COVID-19 impact last year.
Also the second half will be challenged as we anticipate non residential and multifamily in new construction markets will slow due to the air pocket We've mentioned.
We estimate our adjusted operating margins, maybe down 50 to 90 basis points the.
This is primarily driven by the 2021 time cost headwinds of $15 million.
Decrements of lower volume incremental investments of $13 million and general cost inflation, which are being partially offset by $14 million of incremental restructuring savings along with price and productivity actions.
Now a few other key inputs to consider for 2021.
We expect corporate cost to be about $40 million for the year.
Interest expense should be roughly $10 million.
Our adjusted effective tax rate for 2021 should approximate 27%.
Capital spending is expected to be in the $40 million range as we will continue to reinvest in our manufacturing facilities systems, and new product development, which will support future growth and productivity.
Depreciation and amortization should be approximately $46 million per the year.
We expect to continue to drive free cash flow conversion equal to or greater than 100% of net income.
We are assuming a one two to the Euro U S dollar of foreign exchange rate for the full year versus the average rate of one <unk> in 2020. Please.
Please recall that for every one set of movement up or down in the Euro dollar exchange rate, our European annual sales of impacted by approximately $4 million.
And our annual EPS is impacted by one set.
We expect our share count should approximate $34 million for the year.
Finally, a few items to consider for Q1.
For Q1 organically, we see sales down 3% to up 1% with Americas, and Europe sales slightly negative and FDA likely experiencing organic growth in line with the full year range due to easier comps from Q1 Covid impact last year.
We estimate our Q1 operating margin will be flattish in the first quarter as compared to Q1 last year.
<unk> sales should approximate $2 5 million in Q1 $1 million in the Americas, and $1 $5 million enact in the year.
We expect incremental investments of $2 million to $3 million in Q1.
The investments will be offset by about $5 million of incremental restructuring savings.
The adjusted effective tax rate should approximate 26%.
We anticipate foreign exchange would be of tailwind in Q1, given current rates as compared to the first quarter of 2020.
So overall, we see 2021 is the transition year for the company.
During this time, we expect many of our end markets may be adversely affected putting pressure on our organic growth and margin expansion opportunities, but we are taking this opportunity to convince the continued to invest for the future deepen our customer relationships and empower our people to drive us forward.
With that I'll turn the call back over to Bob the <unk>.
Summarizing our discussion before moving to Q&A Bob.
Thanks for the Shank, Please turn to slide 11, let me summarize our discussion.
The team successfully navigated through a very trying year, we were able to adapt to the many challenges caused by the COVID-19 pandemic delivering strong results by controlling what we could given the economic environment.
Our market outlook for 2021 remains guarded tie.
Timing for broad dissemination of the vaccine is critical to reduce uncertainty and restore some normalcy to the markets.
We see a challenging year, starting in the second quarter, given current industry indicators and the lack of new non residential and multifamily construction starts in 2020.
Smart and connected products continue to gain momentum and we expect they should continue to grow in 2021.
Productivity and efficiencies gained through the one watts performance system will continue and help fund investments.
We plan to deliver strong free cash flow as always we will remain disciplined in our capital deployment prioritizing reinvestment in bolt on acquisitions that strengthen our core further expand our geographic reach and add technology to build scale.
We will be closely monitoring how the COVID-19 vaccination process develops and how that affects customer sentiment and the construction markets.
Given our 2020 performance I'm very confident of our experienced team will work through the near term COVID-19 issues and execute on what we can control in 2021, while still focusing on our long term growth strategy.
With that operator, please open the line for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone keypad. John Your question press, the pound or hash key please standby, while we compile the Q&A roster.
Your first question comes from Nathan Jones with Stifel. Your line is now open.
Good morning, everyone.
Good morning.
Thanks, very much per all of the color on your end market expectations the above thats very helpful.
Maybe just a few questions on the cost side to start with.
Thank you made a couple of comments during your remarks $15 million of costs through tightening in 'twenty, one and $14 million incremental cost savings in 2021 can you talk a little bit more detail about what the level of of temporary costs that you took out in 'twenty that every tightening of us as carryover savings from structural actions.
Just to put a finer point on that and then given that you know the expectations net revenue of gotta be.
Download in the mid single digits year in 2021, whether you need to take more cost actions or more planning to maintain capabilities for a potential rebound in 2022.
So on the on the cost actions that are coming back it's about $15 million of the headwind primarily starting from May onwards, and what that $15 million is mainly made up of the there was temporary pay cuts we add from the April to September time period, which is about $3 million, we got government subsidy.
The spending in Europe, and in China, which is about $3 million, which again were one time travel market is about another $6 million and thats. The one where we've done a meter obviously in the first six months, it's gonna be light again because of Covid, but in the second six months once things hopefully open up those costs will be coming back in will be metering that based on what the top.
Klein is and then there were some miscellaneous other costs of $3 million and Thats the $15 million of cost headwind that we had kind of included in the budget and obviously, we'll be monitoring the variable pieces of debt like travel more calm on the restructuring side of the 55 million cost out in 2020 about $14 billion water.
Restructuring savings now and that was partially of restructuring savings. So the actions we took saved us $14 million last year and then there is another incremental roughly $14 $15 million that we get in 2021 on top of the $14 million that we had.
Okay, the net temporary versus the restructuring youre about to EBIT in 2020 watts.
That's the fair statement, yes.
Just one more on the repair and replace side of these Bob I know you talked last quarter about not seeing the typical correlation between J D pay recovery of repair and replace and there was some concern that potentially customers balance sheets were wounded and maybe you wouldn't say that typical correlation any updated thoughts with another three months onto your <unk>.
There.
Yeah, I think the troubled markets, which are really the hotels and restaurants side of the business. So I think the occupancies, 10% in some of the hotels et cetera. So I think they're continuing to defer as much maintenance as they can certainly the break fix side of that is happening, but the overall there.
Cash constrained in the I think that continued in the quarter overall, we saw positive residential side and everybody's trying to complete their existing projects that they started because builders want to get paid and get going So I think we're seeing that continuing as expected and our biggest concern is really.
The primarily in the second half of the year given the the starts.
The lack of starts in the multifamily and the nonresidential part of our business.
Do you realize this might create some pent up demand or does it.
Permanently shift that demand growth to the broad.
Yeah, it's tough to tell on that that's a that's of great question, because I think in some parts of there'll be pent up demand that's willing to be spent but others and again those troubled markets. I think it's just going to be pushed to the right until they get their cash flow back. So I think again that's mixed.
Okay. Thank you very much I'll pass it on.
Thanks.
Your next question comes from Jeff Hammond with Keybanc capital. Please go ahead.
Hey, good morning, guys.
Gotcha.
So just on the just just.
Clarification of multifamily what are you looking at or what are you assuming from multifamily I know, it's not going to be as robust certainly of single family, but I thought it would be.
You know fairly stable.
Well the multifamily is overall construction as I said in my prepared comments is gonna be the.
Forecasting the would be down 6%.
What we're most concerned about is when we look at loan originations and.
I'm looking at Q3 document that basically said the original nation of volume index for multifamily is down 31% and that's you know that was in Q3 expecting similar in Q4, So again everybody's completing Jeff what they started but new construction is really slow.
At this point in time permits are down you see the Abi the Dodge momentum index all of those are portending, a softness in that air pocket that we're talking about.
Talking to channel partners, where Theyre also discussing.
That theyre seeing some air pockets in for the first time in a while there's some trades.
Plumbers et cetera.
Unionized labor Thats sitting on the bench.
And not employed right now in particular in New York City. So those of the things that we're most concerned about.
A lot of stuff that startup is being finished and I think that's mixed up into that overall minus 6%, but I think the second half of the year in particular is going to be really challenge.
Okay and then.
So if I look at your bridge it seems like at the midpoint of guidance EBIT down $13 million.
And you've got $28 million of headwind from investments in terms of costs coming back $15 million of structural savings. So.
I guess you have some volume baked in so I don't know if I'm missing something else in the bridge.
The other savings of a favorable mix or.
Yes, so Jeff make mix it is not insignificant.
Difficult the other big piece of the inflation right. So we talked about inflation from commodities and freight and packaging and all sorts of stuff. So inflation is a significant headwind this year and obviously, we got some price to try that to try to combat that so that's the other piece of it but the point you made which is the decrement did the the margins.
590 basis points of op margin.
The degradation is probably driven by the by the decremental on the volume.
Okay, and then in an inflationary at the year like this what kind of price do you typically realize.
We are we implemented price increases of 3% to 5%.
In January and.
We plan on realizing 1% to 2% and were portion of the team to get even more aggressive on that so that's an area that we're pushing hard in the.
Yeah, that's what we're looking at.
Okay, and then last one on the connected products it looks like if I take your 15% now of the 25% put of law.
The growth on the total business your kind of high teens of the 20% kind of growth CAGR.
How are you thinking about that in terms of.
Organic versus these kind of bolt on technology acquisitions.
I think it's going to be a combination of both.
We're first focused on organically transforming our products and again that will cannibalize the existing products, but the whole digitization strategy has become more and more important. So we'll do small bolt ons right now, but I think the majority of it is our focused and whats driving our significant investment is is to take our <unk>.
The products in the electronic by them.
Okay. Thanks, a lot thanks, Jeff.
Thanks.
Yeah.
Your next question comes from Bryan Blair with Oppenheimer. Please go ahead.
Thanks, Good morning, guys good.
Morning, Brian.
You've given a lot of color on.
You know expectations in terms of the moving parts and what's billings impact.
And margins throughout the year.
Level set on an quarterly or first versus second half progression.
Thinking about the down 50 to 90 basis points of the year.
Yes, I think so so Brian D. A lot of the cost actions. We took obviously started the we actually got early so we started march but the bulk of them happened in the second half. So therefore, when you think about margin.
Degradation non expansion a lot of that is in the second half of the first quarter and that's why we gave the first quarter guidance, we kind of said flattish from an operating margin standpoint, because we were still getting the benefit of the actions. We took in Q1 and we didn't have the benefit of that last year in Q1. So to your point of the second half is going to be more weighted around the yeah.
With lower lower operating margin versus 2020.
Got it I appreciate the color.
Anything more I can offer an airco in TDI trends through the fourth quarter and into early 'twenty one.
I guess, given current visibility and market reads Whats your base case expectation for boiler sales per share.
Well, our complete Hh Ws platform, which is boilers and <unk>.
Water heaters, the they were down mid to high single digits in the quarter and we see similar as well.
We're coming into the first quarter of this year so.
Of that that scenario. They were most hit by restaurants hotels et cetera that that was the strength of if you recall last year in the first quarter. We saw a lot of education spending in the first quarter last year, which surprised there was some pent up demand. So we've got a tougher comp.
Particularly in our air co boiler side in the first quarter.
Got it.
Ken you have U S government transitions slash policies and the monitoring section of 2021 planning framework outside of the tax policy, which I assume is more of a 'twenty two watch items.
On the team's radar there.
Yes.
We're certainly watching the stimulus proposal and what happens on that especially if there's.
Energy efficiency type of discussed.
Discussions with that.
On the infrastructure.
So that's a key area I mean again, it's an unknown right now at this point in time, but a lot of talk on roads and bridges.
Certainly we would rather have social infrastructure really focus on health care education, and the airports, but.
They're not talking about that obviously that scenario.
We with other industry participants are focused on pushing where we can but the that scenario, we're hopeful but right now I think theres a lot of talk and we haven't seen much action at this point in time.
That definitely makes sense of IFF.
In an optimistic case scenario and we do have.
Package come through over the near term.
Is there of the potential that that could.
Meaningfully lift your back half expectations or should we assume that kind of.
The spending would take place into 'twenty two.
Reset of our thinking in that direction.
I wish I could be very late in the year, and then definitely more into 2020 true but again.
I don't think of significant at this point in time.
Okay. Thank you.
Thanks.
Your next question comes from Brian Lee with Goldman Sachs. Please go ahead.
Hey, guys. Good morning, Thanks for taking the questions.
And maybe just a follow up from an earlier on around price.
The actions just as you think about the base case for 'twenty, one price cost dynamics here out to the market with three to five year, maybe targeting one to two the few because he base case the one the two.
It is it is it sort of net neutral price cost for the balance of 'twenty, one or are you actually able to get.
A point or two just trying to understand what's baked into your model for.
Price cost.
So luckily with the price and productivity, we offset inflation, that's usually the way we go at it and that's the way we're thinking about this one obviously on the inflation side, though.
Does it is commodities and we have lots of places as you guys know and those take us through the end of June depending on how commodity has progressed over the rest of the year, we might be looking at price again put for now.
That's for you to find that Bob mentioned with the one to two per cent of realization rate.
Okay, and then that gets you to the net neutral on the price.
The price cost dynamics of productivity, yes, that's set of alright, that's helpful.
And then I guess, maybe a bit more color on the air pocket.
You guys have been pretty detailed around the drivers here and sort of the timeframe, but can you can you give us a sense of what percent of exposure you have to multifamily in non res new new construction and then in terms of the timing you know, you're you're calling out Q2, and a weaker back half, but any visibility as we stand year to day as to.
Kind of how.
How that.
Air Pocket might normalize as you move through 'twenty, one or is this are you kind of even shelving that for the 22 discussion at this point.
All of taking your second question for US right on the length of the air pocket.
If you could go back to the Abi and Dodge momentum all of these indices. They started turning negative in the second quarter and usually they have of nine to 12 month lag. So if you take that that point, that's where we come up with our second quarter and we expect that to continue throughout 2021 as to when that turns.
In 2022, we don't know yet and we'll just have to see how those all of those indices progress through the rest of this year, but we have factored in that we will have that air pockets of the two.
The 2021.
As to the challenged markets when we look at all of our challenge of markets right. So the residential multifamily office building stores lodging food services recreation commercial marine that represents approximately 20% of our total watts of business and that's what we say we will be impacted by the air pocket that we expect in the Americas.
And that's on the new construction portion of that.
Ryan one of the key things I think you guys of all heard me talk about this in the past its competence right. Its competence from the builders to invest their cash at this point in time. So I think there's money on the sidelines just waiting for some stability in the markets Youre hearing.
Shortages of supply change with the builders lumber prices are up double so I think we're looking at they're just waiting for supply change the normalized vaccines to be rolled out there is low interest break so at some point. This will be released so the timing of this is it will be very interesting to watch so we see.
The things happening.
In the marketplace of lot of discussions but.
Look at when Youre, not doing loans and you're not doing starts.
Obviously at some point, that's going to catch up with us and that's what the.
While we're talking about the air pocket the way we are.
Alright, Thanks, guys I'll pass it on thanks, Brian.
Brian.
Your next question comes from Joe Giordano with Cowen. Please go ahead.
Hey, guys good morning.
Hi, Joseph.
And can you talk about.
Continue on the smart and connected path year, what that means from a margin standpoint, and like the uplift associated with the percentage ratcheting higher over the next couple of years.
Yeah, I mean look of as we look at our smart and connected solutions. We continue to try to bundle of value proposition to our customer you know higher than our existing value proposition with our standard products. So in general the standard margins tend to be higher but as you know, we're investing significant amounts of in SG&A and R&D.
Right now as we scale up and build those capabilities, but at the standard margin they tend to be higher given the value propositions were offering to our customers.
And as we think longer term you made big strides in Europe on the restructuring in <unk>.
How should we think about the normalized margin potential of Europe versus Americas.
I think as we said we have significant footprints inside of Europe.
So I think structurally margins, we're gonna be lower there and we continue to take a small restructuring actions and.
We have headcount freezes in place.
Turnover.
Take it of course, but.
You know, it's very expensive as you know too.
Take out a lot of people through social plans et cetera, it's the only gotten harder during the pandemic at this point in time. So we continue to monitor that look at that but in general it'll be structure of lower and remember there's a big.
About a third of our business are a little less in the third of Europe business is OEM related so that in general is lower margin business.
I would say that over the last 12 18 months of the things they've done a nice job with the whole value proposition and driving price and that has helped our margins and they're going to continue working on that.
Thanks, guys.
Thanks, Joe Thanks.
Your next question comes from Walter Liptak from day part. Please go ahead.
Hey, Thanks, good morning, guys.
I want to stick with the discussion of Europe, and just wanted to clarify that the air pocket that we're talking about is largely North America and I Wonder if you could talk a little bit more of just about that.
Growth rate in Europe.
You'd go well or or are the headwinds to get to the low end of the range for 2021.
Yeah of the aircraft that we're talking about is in North America. So that's that's what we've been talking about in Europe.
I think shashank talked about at our commercial marine business.
Is what's challenging enough in general Europe.
It's been slow growth for us over this time, but our drains business, which is one of our more profitable businesses getting hurt.
Abnormally hard at this point in time so.
We always planned lower growth in Europe to keep our cost structure down et cetera, but the team as Shashank said and he's done a nice job managing those costs and driving change but.
Low growth.
Offset by our drains business is.
This is why we're giving the guidance of the way we are.
Okay got it and I wanted to go back to the discussion of restructuring and.
Productivity.
Understanding of the $15 million of savings.
It comes two of them is there another phase of restructuring our debt.
You can do or not.
And I think my understanding was there was productivity going on on the factory floor with machinery.
What kind of benefits you will get.
In 2020.
The productivity.
Well first of all we're always driving productivity in our factories.
And that will continue.
When we look at restructuring our teams are always looking for opportunities for restructure we went pretty hard in two.
2020 and went after the.
Any other restructure is longer more difficult requires plans et cetera. So we're always looking at that we'll continue to look at that option, but we're in it for the long run here right. We believe there'll be a recovery coming back we want to be ready to be able to capitalize on that and hit the ground running and that's why we're continuing on our investment.
And the teams will continue to get leaner inside of our factories, but.
We've decided strategically to go after $13 million of incremental investments, primarily driving both productivity and most importantly, our smart and connected strategy to get us to 25% connected by 2023.
Okay got it thank you.
Thanks, Paul.
There are no further questions at this time I will now turn the call back to Bob Pagano for closing comments.
In closing thank you again for taking the time to join US today for our fourth quarter earnings call. We appreciate your continued interest in watts and look forward to speaking with you during our first quarter earnings call in May have a great day and stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
David.
David.
Thank you.
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